United Airlines Holdings, Inc.

Good morning and welcome to the United Airlines Holdings earnings conference call for the second quarter of 2019. My name is Brandon and I'll be your conference facilitator today. Following the initial remarks from management, we will open the lines for questions. At that time, if you have a question, please press star 1 on your telephone keypads. This call is being recorded and is copyrighted. Please note that no portion of the call may be recorded, transcribed, or rebroadcast without the company's permission. Your participation implies your consent to our recording of this call. If you do not agree with these terms, simply drop off the line. I will now turn the presentation over to your host for today's call, Michael Eskinen, Vice President of Corporate Development and Investor Relations. Please go ahead, sir.

Thank you, Brandon. Good morning, everyone, and welcome to United's second quarter 2019 earnings conference call. Yesterday, we issued our earnings release and separate investor update. Additionally, this morning, we issued a presentation to accompany this call. All three of those documents are available on our website at ir.united.com. Information yesterday's release and investor update, the accompanying presentation and the remarks made during this conference call may contain forward-looking statements which represent the company's current expectations or beliefs concerning future events and financial performance. All forward-looking statements are based upon information currently available to the company. A number of factors could cause actual results to differ materially from our current expectations. Please refer to our earnings release, Form 10-K, and other reports filed with the SEC by United Airlines Holdings and United Airlines for a more thorough description of these factors. Also, during the course of our call, we will discuss several non-GAAP financial measures. For a reconciliation of those non-GAAP measures to the most directly comparable GAAP measures, please refer to the tables at the end of our earnings release, investor update, and presentation, copies of which are available on our website. Joining us here in Chicago to discuss our results and outlook are Chief Executive Officer Oscar Munoz, President Scott Kirby, Executive Vice President of Human Resources and Labor Relations Kate Jibo, Executive Vice President and Chief Commercial Officer Andrew Nacella, and Executive Vice President and Chief Financial Officer Jerry Laderman. In addition, we have other members of the team in the room available to assist with Q&A. And now I'd like to turn the call over to Oscar.

Thank you, Mike, and my thanks to all of you for joining us today. We're very excited to highlight yet another successful quarter for United Airlines. And if I could, let me start with a couple of headlines. Thanks to the hard work of United's team, we delivered a third consecutive quarter of strong, adjusted pre-tax margin growth, improving 200 basis points this quarter and accelerating us on our trajectory towards meeting our 2020 adjusted EPS goal. On the operational front... Well, as you know, and obviously we are an outdoor sport, and tough weather at our hubs is nothing new, but weather, combined with issues related to Pakistan and Iranian airspace, as well as the 737 MAX grounding, still didn't knock us off our game. We continued to deliver top-tier operational performance with strong D0 results across the system, and we were the top performer at Chicago Air, Denver, Los Angeles, San Francisco, versus our large hub competitors in those markets. Moving on to another question that comes up, and in respect to the mass aircraft, our number one priority continues to be safety for both our customers and our employees. I want to commend our team for their work in rebooking customers who are impacted by the grounding in the most efficient, timely, and caring way possible. And we will continue to make sure that our customers get taken care of. Finally, we continue to introduce great improvements to the United experience, allowing us to better serve our customers every time they travel and making them want to choose United in the future. We turn to slide four. Our performance and financial results in the second quarter have further increased our confidence that we can work through and deliver results even as we face multiple speed bumps. Second quarter, adjusted pre-tax earnings were $1.4 billion, with an adjusted pre-tax margin of 12.4%, another quarter of 200 basis points in margin expansion year over year. And today, we are raising the midpoint of our full year 2019 adjusted EPS guidance with a new range of $10.50 to $12. This raise is our proof-not-promises mentality at work, a powerful demonstration that we expect to consistently deliver on our commitments. We said we would continue to execute on our multi-year network strategy, flying when and where our customers want to travel. This quarter alone, we launched 34 new domestic and international routes, including headline-catching international destinations that no other U.S. carrier offers, like Washington Dulles to Tel Aviv, Denver to Frankfurt, Newark to both Prague and Naples, and soon we'll be adding four additional routes to Tokyo Haneda. We said we would become the most customer-carrying airline in the industry and deliver the most exciting series of improvements to the flying experience. Scott, Kate, and Andrew will touch on that in a moment and provide examples of ways we go above and beyond to be the airline that customers not only choose to fly, but love to fly. And as we look toward the future, we believe more than ever that no matter what challenges arise, United has put itself in the best position to succeed. So with that, thank you, and I'll turn it over to Scott.

Thank you, Oscar. It's great to have everyone on the call today. We had another strong quarter here at United. We continued to build on our track record of no excuses, and for the seventh quarter in a row, we came in above the midpoint of our adjusted pre-tax margin guidance. And that's despite the max issues, suspension of our flights to India, and a 17% increase in weather-related air traffic control delays year over year. I'd like to commend our employees for the exceptional job they did navigating through such tough circumstances, while still managing to provide exceptional customer service and meeting and exceeding our financial commitments to all of you. The United team is not making excuses for exogenous headwinds. We're simply buckling down and overcoming those headwinds. Operationally, I'm proud of the team for continuing to run a strong operation and taking care of our customers. As Oscar mentioned, we were number one in D0 in all four of our hubs where we have competitors of similar scale, Chicago, San Francisco, Los Angeles, and Denver. And we were number one in completion factor in three of those four hubs. United really is the best at dealing with the inevitable headwinds like weather that come with being a global airline. We're now well into the second year of our growth strategy and hitting our stride. The network plan we outlined last year continues to capitalize on our uniquely United strength and has further bolstered our connecting hubs, growing our flow revenue and resulting in improved domestic profitability. But we aren't just relying on growth or our commercial emissions. We're investing heavily in our people, product, and operation to build customer loyalty so that customers choose to fly United. We're making investments across the board, and I'll highlight just a couple that are significant, and then later, Andrew and Kate will talk even more about what we're doing for our customers. One new tool, which we've previewed for you in the past, is what we call Connection Saver. It does two important things. First, it messages customers detailed directions to their connecting gate. Second, it equips employees with powerful new technology, allowing them to identify situations where a connecting flight can be held a few extra minutes for customers attempting to make tight connections. And they can do it and still get to the plane to its destination on time. Tens of thousands of United customers have already benefited, making tight connections and getting to their destination without delays. We believe that customer loyalty generated by Connection Saver will help to build long-term, loyal, united customers. Wi-Fi is another product that's incredibly important to our customers. And while we're still making improvements, we've rolled out significant new software and hardware overhauls. on two of our platforms this year, and in addition to other improvements, the stats are telling the story of a vastly improving product. We've seen a 20% improvement in customer satisfaction for Wi-Fi, and our compensation refund rates are down around two-thirds because the system is just more reliable. For the past year or so, we've been working towards a goal to get the system to a high enough level of reliability and bandwidth that we can make Wi-Fi free for our customers. We're excited at the progress we're making towards that goal. Our technology team is doing an incredible job helping us to make the customer experience better here at United. While I highlighted a couple of items today, next quarter we plan to have Linda Jojo, our Chief Digital Officer, give you a little more detail on some of the exciting innovations that have been and will be happening in the future. Because improving the customer experience is such an important pillar of our strategy. Today, we wanted to invite Kate Gebo, our Executive Vice President of Human Resources and Labor Relations, on the call to discuss some of the amazing things the United team is doing to help change the culture, because that's the key to improving customer service, so customers will have reasons to choose to fly United. Finally, as Oscar mentioned, despite the headwinds, our results give us confidence to raise the midpoint of our 2019 full-year adjusted EPS target by 25 cents. We also have increased confidence in meeting or beating our 2020 adjusted EPS target as we enter the back half of 2019. And with that, I'll turn it over to Kate.

Thanks, Scott. It's great being on the call today. I lead our human resources and labor relations team, and I'm energized by the opportunity that we have support our people and set them up for success with our customers. From hiring the right people to continuing to develop those who are already here, we are building an internal service culture that matches what we aspire to deliver to our customers. We believe that our focus on customer centricity, the way we interact with our customers, is as important as our multi-year network strategy. All 95,000 plus of our team members know that it's not just about growing the network, but it's about changing how people feel about United. It's why the 4-4 is so important and why we're talking about this on our call today. A strong, engaged workforce is critical for everything we do, whether it's running a strong operation, growing the airline, or exceeding our customers' expectations around service. As Oscar mentioned last quarter, our Chief Customer Officer Toby Enquist is leading backstage a unique engagement experience for our 25,000 flight attendants. This year we're hosting 34 events for 800 flight attendants at a time to share the why behind the decisions we make and underscore the important role our flight attendants play in delivering great service. Through June, we've held 17 of these events and hosted over 13,000 of our flight attendants. At each one, we personally thank our flight attendants for their hard work, but more importantly, Listen to their ideas on what we can do better, both for them and our customers. As a result, we've already made changes for both our customers, things like increasing buy-on-board provisioning, and our employees, such as offering a courtesy call back when the crew scheduling team isn't immediately available. I'm sharing all of this because culture and engaged employees enable our entire strategy and deliver results. Engage and empower employees drive improved customer satisfaction and loyalty. On the employee side, flight attendants who have been to Backstage have a 10% higher employee engagement rate than those who have not yet attended. That engagement supports many of our commercial initiatives, including a 10% increase in corporate revenue here today at United, proving that a great network and great service are driving customers to choose to fly United. We believe improved customer service positively differentiate their product, and will continue to make United the airline people not only choose to fly, but love to fly. That is why we are announcing a similar backstage event next year for our nearly 15,000 customer-facing employees who serve our customers both at airports and over the phone, building momentum on our customer-centric journey. With that, I'll pass it over to Andrew to talk about our commercial performance.

Thanks, Kate. In the second quarter, our pricing growth accelerated to up 2.5%, which was at the high end of our unit revenue expectations at the start of the quarter. Passenger revenue growth was up 6.1%. Overall, we are pleased with our revenue performance and our ability to successfully work through the headwinds we encountered during the quarter. The growing success of our commercial initiatives helped us navigate a challenging environment and produce strong revenue results regardless. Our best performing region in the second quarter was Latin America. On our last call, I described the outlook for Latin America as stellar, and in fact it was even better than that. Second quarter PRASM increased 9.1%, which is above our early expectations and represents the highest growth for NEMC and quarter over the last few years. Demand for our flights was strong across most of the region, and we expect continued strong performance in the third quarter, albeit at a more moderate level. Performance across the Pacific also had strong showing in the quarter with a 2.8% increase in browsing. I'd have to say the Pacific was maybe our biggest surprise given all the negative trade headlines we saw earlier this year. While the China portion of our Pacific entity did have some volatility in the quarter, we were able to manage other parts of the region to more than offset. Increased collaboration between United and ANA, our joint venture partner in the Pacific, was a clear driver of this performance. We expected a negative impact to the Atlantic in the quarter due to a later Easter holiday, but our prasm did inflect versus the first quarter and increased by 0.6%. On the domestic prasm in the quarter, increased 1.9% on a 4.0% increase in capacity. Close-in business demand was strong, and it's interesting to note that excluding Hawaii, our domestic prowess would have been up by 2.5 points in the quarter. This is further evidence that our growth at our mid-continent hubs is working. Looking ahead to the third quarter, we expect our consolidated passenger unit revenue to be up 0.5% to 2.5%. The domestic and Latin environments look positive with strong demand and yield growth. Hawaii, which represents 10% of our domestic capacity, had a challenging Q2, but the outlook looks better going forward. For the full year of 2019, we expect that overall capacity growth will result in approximately two points less growth than our original plan due to the grounding of the 737 MAX jets and suspension of India flights. By the end of the second quarter, we were short 19 MAX aircraft, and the closure of our two India routes represents the equivalent of another 11 737 aircraft, a significant portion of our capacity. We expect the MAX jets to return to flight no earlier than November 3rd. As you're aware, we suspended service to Delhi on April 4th and Mumbai on June 22nd. However, on Monday night this week, we received great news that Pakistan has reopened their airspace. That news came just hours after we decided to push resumption of our India flights to late October. We're excited to relaunch service back to India as soon as possible. Our team has started our resumption of flight procedures, and we can now confirm service will resume to both Delhi and Mumbai on September 6th from New York. For 2019, we now expect full-year capacity to be up 3% to 4%. We anticipate we'll be able to make some of this lost capacity up next year, but not all of it. Turning to slide 12, we'll continue to focus on our commercial initiatives. Premium Plus currently represents about 2% of our wide-body ASMs, and we expect that to increase to 8% when fully rolled out. Rasm gains replaced with Premium Plus range between 4% and 6% after accounting for all buy-ups and buy-downs. Our first set of CRJ 550s are being prepared to enter service later this year, with client focus on Chicago and New York. We expect the 550 will begin to close the structural gap with premium customers that we have in smaller communities across the United States. In 2020, we expect to be in service from New York, Los Angeles, Chicago, and Washington to Tokyo's downtown Pineda Airport, complementing and expanding upon our distant flight from San Francisco and building on our industry-leading service to Japan. We rolled out our first of our specialized 767-300s with high premium seat counts for service fares and city fares with unmet business class demand on United. All flights from Newark and Chicago to London Heathrow are scheduled to be operated by this new fleet type later this year, followed by Switzerland in 2020. I'd like to give a shout out to the operations team who worked with the commercial team to develop this unique product, while also permitting approximately half of our remaining 767s to operate in a typical configuration to destinations not needing as many Polaris seats. This aircraft is Along with the CRJ 550, our two initiatives focus on capitalizing on the high volume of premium demand in our markets. In the second quarter, corporate revenues, which look much closer to departure, increased 6%, consistent with our top-line revenue growth. Over the last eight quarters, we've talked about a pipeline of ideas and innovations that drive improved financial results and customer engagement. One of the many ways we measure the success of our initiatives at United is engagement characteristics of new flyers who take three or more trips per year. We are pleased to share that new flyers in early 2019 were up 11%, a noticeable increase year-over-year. What's more, we see a strong engagement of these new flyers with United across multiple areas, including overall travel spend, being a co-brand cardholder, and achieving premier status with Mileage+. Growth among millennial travelers has also been especially strong, which is critical to secure in our next generation of loyal Leaky customers. As we put the customer at the center of everything we do, we're encouraged by these results as much as by our financial results and believe this is yet another validation that our strategy is working, even when faced with significant headwinds. Thanks to the entire United team for a great second quarter. And with that, I will turn it over to Jerry to discuss our financial results.

Thanks, Andrew, and good morning, everyone. Yesterday afternoon, we released our second quarter 2019 earnings and our third quarter investor update. You can refer to those documents for additional details. For the highlight, slide 14 is a summary of our GAAP financials and slide 15 shows our non-GAAP adjusted results. We are pleased to report adjusted earnings per share of $4.21 for the second quarter. up 31% versus a year ago. Adjusted pre-tax income was $1.4 billion, and adjusted pre-tax margin was 12.4%, up 200 basis points year over year and marking the third consecutive quarter of adjusted pre-tax margin expansion. This represents another quarter of solid execution. Slide 16 shows our total unit costs for the second quarter and our forecast for the third quarter and full year 2019. Turning to slide 17, non-fuel unit costs in the second quarter increased 0.6% on a year-over-year basis. We were able to achieve the midpoint of our guidance as our continuing drive to run a more efficient business helped to offset normal inflationary cost pressures and lower capacity than originally planned. With our non-fuel unit costs down 1.8% in the first quarter, this means that our non-fuel unit costs for the first half of the year ended down 0.5%. Looking ahead for the rest of the year, the reduction in capacity growth that Andrew discussed, together with the timing of certain maintenance events, which moved from the first half of the year to the second half, will put some pressure on year-over-year non-fuel unit costs. For the third quarter of 2019, we expect non-fuel unit costs to be up 1% to 2%, and we expect this trend to continue into the fourth quarter. As a result, we expect full-year non-fuel unit costs to be up between 0.5% and 1% as compared to last year, which is higher than our prior guidance. However, essentially all of the year-over-year increase in unit costs compared to our original plan is driven by the max grounding and the suspension of our flights to India. To put this in a broader context, as we enter our planning season for 2020, I am pleased to report that our current expectation is to be able to fully make up for this year's headwinds and have 2020 non-fuel unit costs flat to 2017, consistent with our multi-year goal to achieve flatter, better non-fuel unit costs. During the quarter, we took delivery of nine new aircraft, including two more 787-10 Dreamliners and two additional used A319 aircraft. We also reached an agreement to purchase 19 used Boeing 737-700 aircraft, which we expect will be delivered from December of this year through December 2021. Opportunistic purchases of used aircraft will remain a key part of our fleet strategy. Finally, as you heard last month, we announced an incremental order of 20 new Embraer E-175 aircraft with delivery starting mid-next year. For the full year 2019, we are now forecasting capital expenditures to be approximately $4.9 billion. While this is slightly higher than our previous guidance, This update is being driven largely by non-aircraft CapEx as we continue to find and execute on high return projects that will continue to enhance shareholder value in the long term. As you can see on slide 18, we spent $536 million to repurchase shares of our common stock in the second quarter at an average price of $84.07 per share. We remain confident in meeting or exceeding our 2020 adjusted EPS target and in our ability to grow margins in the years to come. As a result, our board has authorized a new $3 billion share repurchase program. We will continue to be opportunistic with our share repurchases, and this program remains a core component of our capital allocation plan. Lastly, slides 19 and 20 have a summary of our current guidance. The range provided for capacity, revenue, and costs implies an expected third quarter 2019 adjusted pre-tax margin between 10 percent and 12 percent. As Oscar mentioned earlier, we now expect full year 2019 adjusted earnings per share to be between $10.50 and $12. Please keep in mind that our guidance always takes into account the risks we naturally face, and we certainly expect to come in at the high end of this range should we not hit any more speed bumps the rest of the year. Despite the limitations we have faced deploying our capacity, our laser focus on cost coupled with our commercial strategy put us well on track to deliver on our financial targets and create long-term value for our shareholders. With that, Mike will now begin the Q&A.

Thank you, Jerry. First, we will take questions from the analyst community, then we will take questions from the media. Please limit yourself to one question, and if needed, one follow-up question. Operator, please describe the procedure to ask your question.

Thank you, and the question and answer session will be conducted electronically. If you'd like to ask a question, please press star followed by one on your touchstone phone. If you'd like to be removed from the queue, please press the problem sign or the hash key. If you're on a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Once again, if you'd like to ask a question, please press star 1 on your touchtone phone. Please hold for a moment while we ask them to alert you. And from Deutsche Bank, we have Michael Lindenberg. Please go ahead.

Yeah, hey, thanks. Hey, good morning, everybody. Two questions here, just as it relates to 100-seaters. I think, and maybe this is to Andrew, I think in the past you've been pretty public saying that maybe 100-seaters don't make sense, even given the size of your hub. And yet, you know, you have been inducting a sizable number of A319s. I know they're used through this quarter, and I realize they're a little bit above 100-seat, but they sort of fall into that, call it A220-100 pocket. And now the news out about buying some used 737-700s. And I'm just curious, you know, it feels like a little bit of a 100 or 100-plus feet type strategy on one hand. On the other hand, maybe it's just an opportunity to get very cost-effective or, you know, attractively priced lifts. Your thoughts on that? Thank you.

I think the answer is just both of those things, you know. From our perspective, we looked carefully at our hubs and concluded that the 100-seater is not the right aircraft for United at this time. But the aircraft you're referring to have about 125 seats. That's a pretty big difference for us and the right niche for our network at this point in time. But I'll let Jerry follow up on the other part of that question.

I think Andrew was right. We've been very opportunistic in sourcing used aircraft. And just like with the 319s that we acquired, there was an attractive transaction that we took advantage of for the 700s.

Great. And then just my second to Andrew, your Asia Pacific, as you said, you were pleasantly surprised given the headline. And we were even more so surprised, you know, just given one of your competitors last week, their Asia pack performance versus yours. You obviously have a lot more exposure to China. They called out Japan as being somewhat weak. Did you... see weakness there in Japan or, you know, was it more of a benefit given the move in the FX? You know, what were some of the moving pieces that helped drive that?

Definitely a lot of moving pieces, but I think first and foremost, I think it shows that our Pacific entity is just an incredible asset of United Airlines and is doing very well. Our Japanese performance, Japan performance last quarter was fine. I wouldn't cite any weaknesses.

From JP Morgan, we have Jamie Baker. Please go ahead.

Hey, good morning, everybody. So a question on capacity. You know, we all recall how the market initially responded in January of last year, you know, to the 4% to 6% growth rate. When we start looking towards 2020, and bear with me for a second here, you know, the max return is going to add over a point if you're on the upside. There's the incremental 19.73s. which don't appear to have been part of the original plan. You can correct me if that's not the case. We'll have full-year India in there, presumably. I mean, it looks like we're setting up for a 2020 growth rate, you know, uncomfortably above the longer-term 4% to 6%. So I can't quibble with your results to date, but if we neutralize for max in India, it does feel like the underlying growth rate is, in fact, moving higher. So I guess my question is whether that's accurate, and how do you expect to message that to investors to assure us that you've earned the right to grow at what I'm concerned some may view as an egregious growth rate? So I'm done.

Jamie, let me start with one detail to correct one of your assumptions, which is... The used aircraft acquisitions that we've been doing and continue to do is actually part of our base plan. So you shouldn't view that piece as additive.

And I guess I would just say, Jamie, really there's been no change. At its core, no change to the plan. We've obviously been happy with the success of the growth plan, not just the growth plan, but everything else that's going on here at United and all the unique United opportunities in the last couple of years. And as Jerry said in his prepared remarks, you know, we've lost a point and a half or so of capacity to the max grounding in India. And we expect to make about a point of that this year. So another way of saying all that, given the issues that happened with the MAX in India, is actually that despite the successful plan, we sort of expect now 2020 to be about a half point lower than it originally would have been if we not had this. those issues.

Hey, and Jamie, one more point. Keep in mind, none of Boeing's customers know right now exactly when they're going to get their scheduled max deliveries, but one could assume that we won't fully catch up next year.

Okay, that's all very helpful. I guess there are never guarantees in the business, but Does that assure us pretty comfortably that we'll be under, you know, at or under 6% for next year, or is it too early to tell?

Jamie, it's Andrew. It's too early to tell. We haven't put together our plan for next year. We really don't have a delivery plan from Boeing, as Jerry just said. So we'll be doing that over the next few months to understand where we are for next year.

Okay, and then a quick follow-up for Oscar. You know, I trust you saw the CSX warning this morning. I hope you don't mind me asking you your opinion, not as it relates to CSX per se, but, you know, it seems like there's this growing trove of data suggesting a more challenging domestic economy. And meanwhile, United, and in fairness, your competitors as well, are seeing something different, something better. You're seeing firming trends. So I'm wondering... What do you think is driving this dichotomy between sort of what the non-airline industrial economy is seeing and the airline economy is seeing? Because it's been going on longer than the usual lag that exists between passenger demand trends in underlying economic terms. I think it's a very encouraging observation. I just wanted to hear your opinion about it in light, yeah, CSX is what got me thinking about it.

Yeah, no, listen, I still follow that business a little and understand it well as well. As I listen to the results, and it will be interesting to see how the whole sector speaks about this, because as I look at CSX as an individual name, first and foremost, every time we want to use the economy as a reason why things aren't working. You have to be very careful when you go there. I think you think about the tariff issues and the trade issues that we've all been facing. I think there's an inventory buildup that you've had over prior years that you're having this sort of But as I look at some of the components inside CSX, I mean, natural gas being lower, they had a refinery explosion that affected their business, they changed their stuff with their motor lanes, other revenues are moving. I think there's a lot of moving pieces that I think have to be thought through and analyzed before we use the economy. And when I switch it back to us, I think you're seeing our comfort and what we see domestically in our business in the near term and our confidence in putting before your guide lives. And so it's a different industry, and I think there's a lot of moving parts that you have to analyze through before making a final decision.

From Vertical Research, we have Daryl Genovese. Please go ahead.

Good morning, guys. Thanks for the time. Scott or Jerry or Andrew, I'm not sure who's best equipped to answer this question, but I think when you initially rolled out The longer term plan that Jimmy just referenced back in early 2018, the CRJ550 wasn't a part of that plan. Now we've had this aircraft come into the plan that presumably, and correct me if I'm wrong, should probably have better unit revenue economics than Certainly the mainline fleet, but probably also relative to a 7060 original jet that you might have contemplated at the time, but probably has worse unit cost economics because you have fewer seats. Plus, I think you just said that you've taken about 50 basis points out of your 2020 capacity plan, and yet you have held your Cosmex guns, at least for the three-year period. What are the things that have gotten better to offset the you know, the pressure from these other items, and then also if you could just provide a little bit of color around what exactly you think the revenue economics of this aircraft may look like relative to, you know, the 76 feeters that you've been adding.

Hey, it's Jerry. I'll start, and then Andrew will talk about the revenue side. Look, on the cause, first of all, in the overall scheme of the business, the 550 is not that large a number. But more importantly, just generally, what gives us comfort that we're going to hit our chasm target for next year are the things that we've been continuing to do. You know, better asset efficiency, you know, that comes from, you know, better utilization of our gates, for example. It'll come from some up-gaging more on the main line than on the regional side, things like that. We continue to make technology investments that increase efficiency. And we're very focused on overhead. As we grow the business, overhead will not grow as quickly as we're growing the business. And a good example is next year will be our second year in a row that our M&A salary dollars will be flat year over year. And probably most importantly, and I've really seen this evolution over time, that this sort of cost control culture is really part of the way everybody thinks. And as we're going into the planning process for next year, we see that throughout the organization. But I'll let Andrew comment on the revenue side.

Thanks, Gary. I would echo, first of all, it's 54 50-seat aircraft. That is not a large number of aircraft to kind of move the overall dial at United. And then the second point in terms of the revenue premium, we fly a mixture of single and dual-class regional jets across the entire network today on the same very route. We have a very, very specific and good idea of how much premium revenue can be generated on a flight in any individual market, because there's other flights in the market that in fact do have a dual-class aircraft. There is a premium to be had. Many of our competitors get it more often than we do, and starting later this year and next year, we will get it as well. We're pretty happy with this decision. As I said in my earlier comments, getting our structural disadvantage in smaller communities fixed is a priority. It also relates to our mid-continent hub strategy, which is working very well. So we're excited to see the 550 answer service and what it's going to do for us.

From Buckingham Research, we have Dan McKenzie. Please go ahead.

Oh, yeah. Hey, thanks. Good morning, guys. Jerry, going back to your commentary about the goal being – to hit the high end of the guidance this year. What has to change for that to happen? And I guess I'm thinking, is it perhaps nothing? I mean, demand seems to be very strong right now. Is it just a continuation of current trends? I guess just knowing you, my knee-jerk reaction is that, you know, you're thinking it's a layup, you know, but I'm just wondering if you could perhaps provide some more perspective around that.

What I tried to say in my comments was that, look, I, for one, tend to be a little more conservative maybe than others, but that's my role. But I am even comfortable that assuming no additional speed bumps, and, you know, you know as well as anybody over time, things can happen in this business. But let's assume, you know, no more surprises. I'm comfortable we're going to beat the high end of our range.

Okay. Second question here, I'm wondering if you can talk about the inefficiency and the overhead today from the max grounding and, you know, perhaps there's some surplus headcount right now. And then from a practical perspective, you know, how quickly, you know, could you get the grounded aircraft back into the network? Is that something that could happen, you know, real time yet, you know, in the fourth quarter or, you know, in practicality would it be, you know, some or sometime next year?

So, first, we're as anxious as anyone to get the airplane, to get the MAX safely back in the air. But safety is the number one priority, and we agree that we should take as much time as required to ensure the safety of the airplane and help build consumer confidence in the airplane when it comes back in. As to timing, the long haul intent for us is really about how long in advance we have to sell tickets. Our ops team is prepared, and they can get the airplanes, do the required maintenance checks and everything that's required operationally to get the airplanes back much quicker than we're going to want to fly them just because of being able to sell tickets. So today we've got the MAX scheduled through, not flying until November 3rd, And so even if we found out in the short term that the MAX was available to fly earlier than that, something we don't think will happen. But even if we did, we wouldn't fly it until November 3rd because we wouldn't have had time to sell tickets. So that's really going to be the long, bold attempt for us. If you look at India, for example, we technically could start flying to India tomorrow, but we're not going to start flying, restart India until September, not for operational reasons as much as because we need some time to sell tickets on the flight. So that's really what drives it. From a cost perspective, yes, we have some higher costs that we are carrying through, and you can see it in the cabin guidance that Jerry talked about. But we look forward to getting the MAX back to flying safely and get everything back on track. And we expect, as Jerry said, next year to be able to make up for all those costs. There's essentially one-time costs that happen this year that we'll recover next year.

From Wolf Research, we have Hunter Kane. Please go ahead.

Hi, everybody. Good morning. Thank you. This is a question for Scott. It's a little bit of a follow-up to Daryl's question. Back at the January 2018 event, you said you were going to track progress of the mid-continental hub changes over four dimensions. You mentioned hub scale, connectivity, revenue quality, and asset efficiency. I'm curious, Scott, where you think you're actually beating the plan and where you think you might be lagging it a bit. Thanks. Thanks.

We do track metrics like that and others that we've added really closely. Really, across the board, I'd say, by and large, we're beating the plan. You can see it in our overall numbers, in our overall metrics. Hopefully, you can hear it in our confidence about earnings this year, about where we're headed for next year. You know, there have been, I guess, tactical issues along the way of dealing with airport infrastructure. You know, Houston's a good example where we have a $365 million project replacing the baggy system. You know, kind of infrastructure. We've been working extensively with Denver on accommodating growth. You know, new facilities coming here in Chicago in the years to come. So I'd say the plan is on track to slightly ahead of plan. really almost across the board on all those metrics. An important part of it is getting customer loyalty as well. We have all kinds of data that shows that we are winning customer loyalty. We're incredibly focused on it. I talked today in my opening remarks about some of the investments that we're making for the customer. And, you know, it's kind of a snowball effect that as things are working, like it's not just the network, it's not just the commercial operations. We're running a good operation. We're delivering better customer service. It kind of all gets better together and creates the resources to invest even more in the operation and the customer. So, you know, we feel really good kind of on all those dimensions about how the plan is coming together.

Scott, I'd like to add. First of all, we would say our proud and growth domestically is where we want it to be and I think reflects the success of the mid-continent growth strategy. And then internally, when we look at the profitability of the hubs, we know we're on the right track.

From Credit Suisse, we have Joel Caiado. Please go ahead.

Hey, good morning, everyone. Following up from an earlier question, I think it was Dan's question on the match, just based on your conversations with the manufacturer, with regulators throughout this process, and in light of the most recent developments in the recertification efforts, the news over the last few weeks that there may be some incremental issues that need to be addressed, do you think that there is now a higher likelihood of mandatory simulator training? And if so, what would that do to the timeline for making the aircraft ready for flight once you officially get the green light from regulators?

We're not going to speculate on that. We've stayed very close to the regulators. We've also done independent work at United. And, in fact, we have already started incorporating regulators enhanced simulator training into our own training programs, not just for the MAX but for all aircraft. One of the great things about the safety culture in the airline industry is that we are constantly learning and getting better. We do have unprecedented levels of safety in the airline industry. and we take every opportunity to learn and get better, and so we aren't just waiting on a regulatory framework. We will, of course, meet anything that is in the regulatory framework, but we expect we already are beginning to go beyond what we would expect from that regulatory framework.

I would just add, Joe, traditionally we always go above and beyond the training that's required, so we will continue to do that on whatever base is introduced to us.

Got it. That's helpful. I appreciate that. And then just sticking with the fleet question for my follow-up, Scott or Jerry, I believe the next one or certainly one of the next fleet decisions that you have to make is your 057 and 67 replacement plans. Airbus launched a product in that market segment at the Paris Air Show. Boeing, understandably, right now is all consumed with the MAX situation. I'm sure you'd like to see the official competitive response from them before you make a decision. But if it's now looking like the NMA launch is slipping to the right a bit, maybe the target EIS date of mid-2020s also slips to the right a bit, I guess the question is how long can you afford to wait before you make a decision there?

So we have some time, but you're right. We would like to see some clarity so that we can make a choice. But we do have a little bit of time that we can wait.

From Cohen & Company, we have Helene Becker. Please go ahead.

Thanks very much, Dr. Ritter. Hi, everybody, and thank you very much for the time. I have a question for you, Oscar. I think... in September you'll be with the airline for four years now. And I was just kind of wondering if you could talk a little bit about the differences that you see now versus then when you first, you know, came on as CEO and how that will translate into, you know, kind of the outlook for 2020 and maybe into the next decades.

What a great question. The differences are literally night and day. We all couldn't be more proud of the pride and professionalism and re-energized efforts of our frontline folks and people that treat our customers. And as importantly, we have many constituents, obviously, with you as investors. The team that has assembled in front of you today on this call and for the last couple of years is arguably one of the best in the industry. And they're all relatively young and energetic and full of confidence and vim and vigor, and I see just continued great aspects. We are putting our long-term plan together as we speak, and there's a lot of energy and momentum that we look forward to sharing with you in the future. But thanks, Elaine. It's a very different place, for sure.

Thanks, Oscar.

Okay. And from Wolf Research, we have Hunter K. with a follow-up. Please go ahead.

Oh, thanks. Sorry, my line dropped. My follow-up was about Expedia real quick. I'm curious to see your take on whether or not this relationship can be fixed by pricing concessions, or is there a longer-term strategic angle on distribution here that you think maybe justifies some near-term risk-taking? Thanks.

I think that's a really good question, and we are – When we do these deals, we think about the very long-term and where we want United, where we want our distribution to be. We have had a number of conversations with Expedia in the past month or so, and we've yet to be able to conclude a way to get around some of these issues. And at this point, we don't have a deal. So we are preparing to move on, as we previously said. And, you know, we'll see where we go. the long-term distribution, and what we're doing with United.com, which we're incredibly excited about, and the growing use of our app, which is off the charts. It is pretty impressive to us, and we're excited about it.

All right. Thanks, Andrew. From Raymond James, we have Savi Sait. Please go ahead.

Hey, good morning. Just a quick follow-up before my question. On the domestic lab plan you mentioned, kind of third quarter should be up. I was wondering if that means kind of Atlantic and Pacific, how you're thinking about it, maybe that it could be down, or maybe I missed a comment on that.

Tim, you're talking. You know, as we look at the environment, we clearly see a great deal of strength in LATAM and domestically as we did in Q2, so we're pretty excited about that. What I would say, you know, as we look at Europe, last summer, and particularly last August, our performance across the Atlantic was just unbelievably great, and that's created a hard comp. And across the Pacific, Our performance in both August and September was really good, which has created a hard comp. So overall, I think we're pretty pleased where things stand, particularly when we look on a year-over-two-year basis. But the absolute number for the Pacific and the Atlantic will be lower, given last year's comps and where things stand right now. But overall, I think we're pretty bullish about the environment in general, and particularly here within the United States.

That's helpful. Thank you. And just something I'd ask on the Avianca investment and the kind of changes going there, just, you know, I was wondering what your kind of updated view on that strategic relationship was, and also particularly on the three-way joint venture that you're looking to put together, if the turnaround that Avianca is working on, if this kind of delays that Davey discussion.

So Sam, let me start so I can comment on what's going on down there. First, we have a great deal of respect for the management team they now have in place and think that the plan they have both short-term as well as longer-term is exactly what they should be doing. And in fact, if they get through this short-term plan, we said we're willing to make an additional investment through a loan to the airline. So very optimistic about what they have going on. I'll let Andrew comment on the joint venture.

On the joint venture, we continue to work down that path. We're really excited to bring together our network along with Copa's and Avianca's. We think it's going to be a powerful alliance that can help us compete against the other large carriers in the region. So full speed ahead on that front.

From Morgan Stanley, we have Rajiv Lalwani. Please go ahead.

Hi, good morning. Thanks for the time. I guess a revenue question for Scott and Andrew. As we look at your guide for the full year and think about the fourth quarter in particular, is there anything that we should be aware of as far as a headwind, whether it's something around Expedia or a calendar dynamic or demand or anything like that, just trying to make sure that there isn't some sort of notable decline or anything like that. And then relating to that, Scott, are you still generally targeting positive PRASM? And that's it on the revenue side?

So there's nothing contemplated in the guide that would be any kind of negative. I guess we didn't get fourth quarter PRASM guidance, but I guess you're backing into that. based on the midpoint of our guidance. I think I'd just refer you to what Jerry said, which is, you know, we've had a... Seven quarters in a row of being the midpoint of our guidance. We contemplate unexpected speed bumps when we give guidance, particularly the further out it is. And if we don't hit speed bumps, we do expect to be, as Jerry said, at the high end of our earnings, which obviously changes probably what you think about our required present guide. So I don't think there's – you shouldn't be reading anything into commentary about fourth quarter prasm or any unidentified risk in our number.

Hey, Rajiv, this is Mike. Listen, we give one quarter guidance out, not two quarters, and so I used to do the nerdy NLS math as well and take the full year minus the 3Q. You shouldn't be doing that. If you do that, you're going to come to the wrong conclusion.

Yep, understood. Thanks for calling me up. A nerd, but as a follower.

To be clear, that was less good than not me.

A question for you, Jerry, actually on the CASM side. I appreciate the comment you made about hitting the targets you've laid out previously, but is it fair to assume that if we don't have a pilot deal in place that you should do even better than the numbers that you highlighted earlier?

I don't want to be too specific about it, but one thing I need to remind everybody is that our chasm guidance takes into account everything we have going on with our work groups.

We hope and expect that we are going to be able to do this no time for all. We are working towards it and making progress.

From Bank of America, we have Andrew Jodora. Please go ahead.

Hi. Good morning, everyone. So, Scott, I think each quarter since you put out your three-year plan, both the management team and the market has gotten more comfortable with your $11 to $13 EPS target next year. And I guess if Jerry's confidence comes through, that's kind of the number that we'll be seeing this year. So I'm not asking for another three-year plan today, but can you maybe help us frame how you think about the earnings trajectory for United beyond 2020 and maybe any headwinds, tailwinds that you see in the business outside of the macro. Thank you.

Well, we actually kind of internally have a framework not as well-defined yet as what we did for the 2020 where we think we can have flat earnings Chasm for several years to come by Chasm X and expect that we can grow rather, you know, half point to a point higher than the, over the time, over the increase in fuel price. It's another way of saying, you know, internally we are driving towards a goal of growing our margins by half point to a point per year.

Thank you. And then just a logistical question for you, Scott, or maybe if Greg is there. So with the MAX, I know you had aircraft that you were supposed to be taking and will be taking in the back half of 17. So when the plane does get back up and running, how quickly can your team begin taking delivery of the aircraft? Is this something where you're limited to a few aircraft a month or something like that? Just trying to get a sense of if Boeing wants to give you all your aircraft immediately, how quickly can you take them?

Thanks. We will be able to take the aircraft as quickly as Boeing can make them available to us. You know, we've, in the past, during peak months, taken seven, eight aircraft a month easily. So the constraint won't be on our end. We'll take whatever Boeing is able to deliver to us.

Thank you, and ladies and gentlemen, this concludes the analyst and investor portion of our call today. We will now take questions from the media. As a reminder, if you would like to ask a question, please press star followed by one on your touchtone phone. And we're standing by for questions. And please hold for a moment while we assemble our queue. And from Reuters, we have Tracy Rusinski. Please go ahead.

Hi, good morning. You mentioned earlier, I think, moving the timing of maintenance events from the first half to the second half. And in your last statement about MAP scheduling, you said you expect to go from about 40 to 45 daily cancellations in July as a result of the grounding to about 90 in October. Is this doubling because maintenance events are catching up with you, and if so, is there any color that you can provide on that?

Hi, Sandra speaking. The fleet count of MAXs was scheduled to increase over that time period. So when the MAX was originally grounded, I think we had a dozen or so aircraft But by the time we get into the late third quarter and definitely into the fourth quarter, the number of aircraft we intended to be flying is higher, and therefore the cancellation rate is dramatically higher.

I just want to clarify on cancellation. It's not a cancellation that a customer experiences as a cancellation. It's just flying that we're not able to load into schedule. And at least I think that's an important distinction. You know, we're not canceling 40 to 45 flights a day, nor will we be canceling 90 flights a day. We just have the lost opportunity for 90 flights that we would have otherwise grown and flown that now we can't grow and fly.

Yeah, so I understand that, and yet, you know, it's the same situation for Southwest and American. They were also accepting additional deliveries this year, and yet, as you described, the flights that they're not able to load on the schedule have stayed pretty much the same. I know at the beginning of the grounding, you were using larger aircraft to fly those mass routes. I'm still struggling to understand what has changed. For United versus American Airlines.

I'm not sure that they've given numbers, but it's really simple. We have twice as many airplanes. We should have had twice as many MAX airplanes by October as we would have had back in April or May. And so the number of flights to your airport is twice as high. It's very simple.

And from Bloomberg, we have Justin Bachman. Please go ahead.

Yeah, hi. Thanks for the time today. I wanted to go back to the question about the Airbus product and the NMA. And Jerry said you had some time on that decision. And I was just hoping to get a little bit more clarity on what sort of timing United needs on when that decision needs to be made and whether you've talked to Boeing about when they may have some greater detail for you about their product.

I can't actually be more precise other than say we have a little time. But I can also tell you that we, as we always do, have conversations with both manufacturers about their products. And Boeing is aware, and this is really not just us, they are aware that the industry is wanting to know timing on the NMA.

Great. Thank you.

From the Associated Press, we have David Coney. Please go ahead. Yeah.

Hello.

Hey.

I'm sorry. I thought I was muted there for a second. Yeah, just go back. This was addressed a little bit. I'm trying to juggle too many things. This was addressed a little bit on the analyst section, kind of some disparate answers. Just to go back to those 19 used airplanes that there was one line in the release last night, Were those 19,737,700 you bought entirely related to the grounding of the MAX? And if not, can you describe, you know, when you decided to buy those planes and to what extent they are makeup for the MAX?

Sure, Jerry. They are entirely unrelated to the MAX grounding, actually. And in that specific transaction, we were talking to the seller well before the grounding started. These transactions tend to take a little bit of time. This was really just part of our ongoing effort to acquire a used aircraft to complement our new aircraft's order book. It provides us greater flexibility, the ability to grow at a lower capital cost, When you think about 19 used aircraft versus 19 new aircraft, it's hundreds of millions of dollars of CapEx savings and gives us greater flexibility. So it's really just a continuation of that process that we started some number of years ago.

Thanks so much. And are you thinking about leasing or buying any planes to make up for the max?

Again, it's really not so much the max, but, you know, we have – the network strategy, and it's our job to make sure we have the aircraft to fly what the network demands.

Thank you. We will now turn it back to our speakers for closing remarks.

Brandon, thanks very much. We'll talk to you next quarter.

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for joining. You may now disconnect.